Minimum Wage Laws
Part One: Supply, Demand, and Price Fixing
The price any given thing on the market will fluxuate, depending on its supply and demand, towards a certain market price. The reason for this is the conflicting incentives of the buyers and sellers: the buyers wish to buy at the lowest price they can and the sellers wish to sell at the highest price they can--yet sell all that they have. Demand tends to change based on price, and a flexible price allows the conflicting desires to meet where the demand is met and the supply is sold; for if the price is too high, fewer people will be able to afford it and not all will be sold; and if it is too low, more people will wish to buy than are able.
There is no force other than incentive to cause a price to tend toward a market price, but the will to profit and to get a better deal are strong and difficult to cheat on. Furthermore, they require little intelligence to operate, for one merely is required to search for the best deal.
If a the price is set artificially, and not allowed to move to its market price, supply does not meet demand, and the consequences of this follow clearly: too high a price will cause a surplus, too low a price will cause a shortage. This is one of the most basic and certain of all principles of economics.
Part Two: The Consequences of a Minimum Wage
Labor works just like the abstract product we considered in part one. It too has a natural market price toward which wages tend, and those who sell it (the workers) all wish to sell what they have, while the buyers (the employers) wish to buy as cheaply as possible. Given the money that businesses can afford to spend on labor, and the desire of all laborers to work, the market wages that tend to result are those that buy all the workers; for a business who wish to attract workers will certainly tend to pay more; and businesses with many wishing to work for them will certainly tend to pay less, for they can afford to.
If, however, a minimum wage is imposed above the natural market price, as in part one fewer people can afford the product (work) and thus the demand goes down. Thus, one bad effect of a minimum wage is unemployment.
The other bad effect of a minimum wage follows from the greater cost employers must pay for their labor. They must make up the cost somehow, and no matter what they do, the prices of the products they make tend to go up. If they higher fewer employees, production goes down, and this drives up the price. Even if they find ways to make employees more productive, this itself is likely to incur extra costs. If they keep the employees and the extra cost, then to make up the difference, they are likely to charge more. The tedancy of a minimum wage is to increase the cost of production, and thereby decrease the supply and increase the price.
With products more expensive, the intent of the minimum wage has been somewhat nullified: the extra money that those able to find jobs now have is of less use to them because things tend to cost more. It may be that the difference is in the favor of those able to find jobs, but it will certainly not be in the favor of those who have lost their jobs, or of anyone whose wages have not changed. As the minimum wage rises, it will affect more and more people, cause greater and greater unemployment, and decrease production more and more; and there is without doubt a point where a further increase will be beneficial to nobody, not even those who are paid it.
If one is still not convinced that a minimum wage would be harmful, one only needs to imagine a wage so exorbitantly high that no one could miss the problems it would cause. If it were around, say, $50 an hour, nearly everyone would be affected and who but the very richest could afford to employ at that rate? Who could possibly succeed to employ people at such a cost? Who could ever hope to put forth a risk more profitable than being a minimum-wage worker? The market certainly could not survive at that price, and only through the black market, where laws of safety, fraud, and contracts have no hold, could any business at all be done.
In summery, two bad effects of a minimum wage are: that it increases unemployment from essentially nothing to something, and that it decreases the total amount of value that can be produced, such that although those who are paid a minimum wage earn more in dollars, the value that the dollars are able to buy is less.
Part Three: How to Prove That I am Wrong
A friend told me that I don't know about economics but merely know how to spout conservative economic theories. Another friend told me that I am a spoiled rich boy who wishes to condemn people to poverty so that I can live comfortably. This is incorrect, for I have read capitalist, communist, socialist, and Keynesian theories but have only been convinced by the first; and my understanding of the theory indicates that, although bad things can happen under capitalism, it is still the best option for anyone with the will to succeed. It would be very nice if the economy was strong enough to provide for everyone, and for everyone to be rich enough to partake all they want of it; but a strong economy grows from the success of free enterprise and not from a redistribution of wealth, whether to the advantage of the poor or the rich; and wealth is not intrinsic to the money you own but a product of the its buying power in the market.
However, my understanding of economics is not inflexible, and, for the convenience of those who would disagree with the points expressed above, I have provided a series of questions whose answers are sufficient to change my views, for anyone who wishes to attempt it.
1. If the cost of labor is increased, how are employers to avoid these costs? For bills are bills, and money does not just appear. If more of your money goes into one place, less must go into somewhere else. I can think of three places for the money to come from: from profits, from other peoples' salaries, or from cut corners.
2. How can a business with increased cost of production avoid a greater chance of failure? For although many businesses could still survive under these conditions, there will certainly be some who could not.
3. If the production of something is decreased, how is the price of it to avoid increasing? For the tendencies of the minimum wage (to decrease the chance of success and increase costs) make production more difficult, and thus to decrease the supply. A thing which becomes scarcer on the market commands a higher price.
The next time I am insulted for my views of minimum wages, I can direct the insulter to these questions, and should they remain unanswered, I can dismiss the insult as groundless.
Jennifer Diane Reitz's response to this and my reply can be found here.